U.K. to Fight for City of London in Court Clash With ECB

Skyscrapers stand surrounded by commercial office buildings in this aerial photograph taken over the City of London. Britain’s lawyers will take on the European Central Bank in a hearing at the bloc’s top court -- fighting policies they argue would punish the nation’s financial hub because the U.K. has kept the pound sterling. Photographer: Matthew Lloyd/Bloomberg

July 8 (Bloomberg) -- Bruised by David Cameron’s defeat
over the leadership of the European Union’s executive arm, the
U.K. faces its next clash with the EU tomorrow. It touches a
sensitive point -- the City of London.

Britain’s lawyers will take on the European Central Bank in
a hearing at the bloc’s top court -- fighting policies they
argue would punish the nation’s financial hub because the U.K.
has kept the pound sterling.

Cameron’s government is attacking ECB policy documents
stating that clearinghouses handling trades in euros should be
based in the single currency area. Britain says that amounts to
an ultimatum that London-based clearers must relocate to the
euro area or “be precluded from access to the financial markets
in the Eurosystem” on the same terms as rivals that are located
there.

“This is one more example of the gradual transformation of
the single market into a euro-zone market, which is not what the
U.K. or other non-euro countries have signed up to,” Syed
Kamall, leader of the EU Parliament’s European Conservatives and
Reformists group, said in an e-mail. “It is absolutely vital
that we get legal clarity as to whether this is an acceptable
shift or not.”

The hearing at the court in Luxembourg is the latest in a
series of U.K. maneuvers against EU responses to the financial
crisis, including a possible tax on transactions and curbs on
bankers’ bonuses. The U.K. is on a losing streak at the European
Court of Justice. It failed to overturn EU powers to ban short
selling and was told that an early challenge against the
transaction-tax plan was premature.

‘Contravenes’ Law

“We want to make sure that there is a level playing field
across the EU for British businesses which is why we have taken
this issue to the EU court,” a U.K. government spokesman, who
can’t be named in line with official policy, said by e-mail.

“We believe that the ECB’s location policy contravenes
European law and fundamental single market principles by
preventing the clearing of some financial products outside the
euro area,” he said.

Cameron last month suffered defeat at the hands of fellow
EU leaders who brushed off his vocal opposition to the
appointment of Jean-Claude Juncker, the former prime minister of
Luxembourg, as president of the European Commission.

‘Major Concerns’

“The Eurosystem has major concerns with regard to the
development of major euro financial market infrastructures that
are located outside of the euro area, since this could
potentially place in question the Eurosystem’s control over the
euro,” the ECB said in a paper published in July 2011, one of
several that sets out the location policy for clearinghouses.

Exceptions to this principle can apply only in “very
specific circumstances,” such as for “off-shore payment
systems that settle less than 5 billion euros ($6.8 billion) per
day, or that account for less than 0.2 percent of the total
daily average value” of certain transactions processed by euro-area banks.

“The court hearing is a first skirmish in what might
become a much longer running issue,” Nicolas Veron, visiting
fellow at the Peterson Institute for International Economics in
Washington, said in an interview. “It addresses a key question
-- to the extent that the ECB is ready to provide liquidity to
the financial system, how far is the U.K. included?”

Direct Discrimination

The ECB pressure to relocate “amounts to direct or
indirect discrimination on grounds of nationality,” according
to arguments submitted to the court by the U.K.

In practice, the measure cuts off U.K.-based clearinghouses
from emergency support and other facilities from euro-area
central banks, the U.K. says. London is a global center for
clearing of derivatives trades, including those denominated in
euros.

Clearinghouses such as LCH Clearnet Group Ltd., majority
owned by the London Stock Exchange Group Plc, and Deutsche
Boerse AG’s Eurex Clearing operate as central counterparties for
every buy and sell order executed. Traders post collateral, and
clearinghouses maintain backstop funds, in a bid to reduce the
risks posed by individual defaults.

The case “reflects the risk of a potential breakdown of
the single market” between “the euro-zone and the wider EU,”
said Michael Kent, global head of financial regulation at law
firm Linklaters LLP. “The ECB’s argument is that it’s not safe
to clear a euro-zone product unless you have access to euro-zone
central bank liquidity, and that access won’t be provided to
clearinghouses outside of the euro area.”

A spokesman for the ECB in Frankfurt declined to comment.
The ruling in the case won’t come for at least several months.

Euro Denominated

LCH Clearnet’s SwapClear platform handles more than 95
percent of the overall market for cleared, over-the-counter,
interest rate swaps, according to data on its website.
LCH.Clearnet declined to comment on the court case.

Euro denominated contracts account for about 45 percent of
the notional outstanding amount of trades on the platform.

Other central clearers with operations in London include
CME Clearing Europe and ICE Clear Europe.

“The ECB won’t stand behind a clearinghouse based outside
of the euro-zone, and it can’t be made to do so. It’s that
simple,” Karel Lannoo, chief executive officer of the Centre
for European Policy Studies in Brussels, said in a telephone
interview.

“This case is just a waste of time, like the previous ones
on short-selling and the financial-transactions tax. In fact,
it’s even clearer than the other two because it’s about the
single currency, and the U.K. isn’t in the single currency,” he
said.